Diamondback Energy (FANG) made #5 in my Special Report on the 10 most dangerous stocks this earnings season that I’m posting on my paid JubakAM.com site. And I’m selling it out of my Jubak Picks Portfolio today, April 1.
If you’re looking for immediate warning signs for the upcoming quarter Diamondback Energy has them. When Diamondback Energy (FANG) reported fourth quarter earnings back in February, it missed Wall Street projections by 40 cents a share. Consensus estimates for the company’s May 7 earnings report call for earnings of $1.42 a share and revenue of $913.5 million. The stock is up 6.3% since the March 8 local low as of the close on March 29. That all sets up Diamondback for a potential short-term miss.
It’s the company’s fundamental picture that may pose the bigger danger to the company in the short term. Diamondback is out of step with the current Wall Street sentiment of caution toward the oil shale sector. The company has bulked up its oil shale assets through the acquisition of Ajax Resources (in a $1.25 billion stock and cash deal) and Energen (in a deal that saw Diamondback pick up $830 million in Energen debt) at a time when adding acres is less important (it used to be the be-all and end-all of Wall Street dreams for shale producers) than cash flow and fiscal discipline. Diamondback has kept a very aggressive target of 27% production growth for 2019 and cut its capital spending budget by just 2%. Long-term debt has climbed to $4.464 billion at the end of 2018 from $1.477 billion in the fourth quarter of 2017. Diamondback is operating cash flow positive at $413 million but after capital expenditures of $1.819 billion in the fourth quarter of 2018, the company ran a negative free cash flow of $1.407 billion in the fourth quarter. (Dividend payments for the quarter were $13 million.) All those fundamentals mean that Wall Street will be paying especially close attention to the company’s earnings on May 7. A miss then would be multiplied in its effect by that level of scrutiny.